Archive for the ‘Related Civil Litigation’ Category

An FCPA Enforcement Action That Led To A Supreme Court Decision

Wednesday, November 14th, 2012

[This post is part of a periodic series regarding "old" FCPA enforcement actions]

The first Foreign Corrupt Practices Act enforcement action to involve business conduct in Nigeria was a 1985 enforcement action against W.S. Kirkpatrick, Inc. (a privately held New Jersey avionics supply firm) and Harry Carpenter (Chairman and CEO of the company).

The criminal informations filed against the company (here) and Carpenter (here) alleged one count of violating the FCPA’s anti-bribery provisions and contains the same concise allegation.

“On or about December 21, 1982 … W.S. Kirkpatrick, Inc. … used a means and instrumentality of interstate commerce, that is, a Western Union international telex from Fairfield, New Jersey, to New York, New York, to order Standard Chartered Bank of New York to pay $580,973 to the Bank of New York for the account of Bank of Commerce and Credit International in Luxembourg corruptly in furtherance of an offer, payment, promise to pay and authorization of the payment of money to: (a) a person, that is Benson ‘Tunde’ Akindale through two companies, Deriks and Los, Panamanian bearer share corporations, while having reason to believe that a portion of such money would be offered, given, or promised, directly or indirectly to foreign officials, Nigerian Air Force officers, the Party of Nigeria, the Minister of Nigeria and other government defense personnel for the purpose of influencing the acts and decisions of such foreign officials and others in their official capacity and inducing them to use their influence within the Government of Nigeria in order to obtain a contract for flight training equipment for W.S. Kirkpatrick, Inc.”

An offer of proof filed in Carpenter’s case contains the following additional information.

Carpenter learned of the opportunity to sell various equipment to the Nigerian Air Force and he “believed Kirkpatrick needed an agent in Nigeria to assist in negotiating and obtaining the contract.”  “On recommendation of two British businessmen, Carpenter contracted a London solicitor, who in turn put him in touch with Benson ‘Tunde’ Akindele, a Nigerian national.”  According to the offer of proof, “Akindele offered to assist Kirkpatrick by serving as its local agent in Nigeria.  Carpenter negotiated an agreement with Akindele which provided that Kirkpatrick would pay a commission equal to twenty percent of the contracted price of [the equipment] to two Panamanian bearer share corporations, which were set up, and controlled by Akindele to receive payments from Kirkpatrick.”

W.S. Kirkpatrick Inc. pleaded guilty and was fined $75,000 (see here) and Carpenter pleaded guilty, was sentenced to three years probation and ordered to pay a $10,000 fine (see here).  Noted white collar criminal defense attorney Theodore Wells (here) represented Carpenter.

See here for the DOJ’s release which notes that the contract at issue was worth $10.8 million.

After the DOJ enforcement action, Environmental Tectonics Corporation (“ETC” –  an unsuccessful bidder for certain of the Nigerian contracts which first brought the problematic conduct to the attention of the Nigerian Air Force and the U.S. Embassy) brought a civil action against W.S. Kirkpatrick, Carpenter, Akindele and others seeking damages under the Racketeer Influenced and Corrupt Organizations Act, the Robinson-Patman Act and the New Jersey Anti-Racketeering Act.

The defendants moved to dismiss the complaint on the ground that the action was barred by the act of state doctrine.  The district court granted the motion and concluded that the act of state doctrine applies “if the inquiry presented for judicial determination includes the motivation of a sovereign act which would result in embarrassment to the sovereign or constitute interference in the conduct of foreign policy of the United States.”  See 659 F.Supp. 1381.    The court held that ETC’s suit had to be dismissed because, in order to prevail, it would have to show that “the defendants or certain or them intended to wrongfully influence the decision to award the Nigerian Contract by payment of a bribe, that the Government of Nigeria, its officials or other representatives knew of the offered consideration for awarding the Nigerian Contract to Kirkpatrick, that the bribe was actually received or anticipated and that ‘but for’ the payment or anticipation of the payment of the bribe, ETC would have been awarded the Nigerian Contract.”

The Third Circuit reversed finding that application of the act of state doctrine was unwarranted given the facts of the case.  In particular, the Third Circuit found persuasive a letter to the district court by the State Department legal adviser which stated that a judicial inquiry into the purpose behind the act of a foreign sovereign would not produce the ‘unique embarrassment, and the particular interference with the conduct of foreign affairs that may result from the judicial determination that a foreign sovereign’s acts are invalid.”

Defendants then appealed to the Supreme Court which agreed to hear the case.

In 1990, Justice Scalia authored the opinion of a unanimous Supreme Court.  See 493 U.S. 400.  The opinion begins as follows.  “In this case, we must decide whether the act of state doctrine bars a court in the United States from entertaining a cause of action that does not rest upon the asserted invalidity of an official act of a foreign sovereign, but that does require imputing to foreign officials an unlawful motivation (the obtaining of bribes) in the performance of such an official act.”

The Court concluded that the “factual predicate for application of the act of state doctrine does not exist” because nothing in the case required the Court to declare invalid the official act of a foreign sovereign.  The Court reasoned that “neither the claim nor any asserted defense requires a determination that Nigeria’s contract with Kirkpatrick International was, or was not, effective,” that ETC “was not trying to undo or disregard the governmental action,” but rather that ETC was only trying to “obtain damages from private parties who had procured” the contract.

In short, the Court stated that the act of state doctrine “has no application to the present case because the validity of no foreign sovereign act is at issue.”

Friday Roundup

Friday, October 12th, 2012

Beverage industry news, a long-running FCPA-related civil case settles, checking in on the World Bank, survey says, and on-point.  It’s all here in the Friday roundup.

Beverage Industry News

Disclosure by Central European Distribution Corp.

As noted in this Wall Street Journal Corruption Currents post, Central European Distribution Corp. (here - one of the world’s largest vodka producers) recently made an FCPA disclosure.  In this filing, the company (a Delaware company headquartered in New Jersey) stated as follows.

“It has [...] been determined that there has been a breach of the books and records provisions of the Foreign Corrupt Practices Act (FCPA) of the United States and potentially other breaches of the FCPA. It was determined that payments or gifts were made in a foreign jurisdiction in which the Company operates, and that there was a failure to maintain documentation in respect of certain of these payments or gifts adequate to establish whether there was a valid business purpose in making the payments or gifts. Furthermore, our management also identified a material weakness in our internal control over financial reporting regarding the implementation of our policy on compliance with applicable laws as of December 31, 2011. Our conclusion that this deficiency is a material weakness in our internal control over financial reporting is not based on misstatements in our historical consolidated financial statements or our consolidated financial statements as of and for the period ended December 31, 2011, but instead on the determination that we did not design or maintain sufficient policies, procedures, controls, communications or training to deter or prevent the risk of violations of law, including the Foreign Corrupt Practices Act (“FCPA”) of the United States.”

Beam Inc. Investigating Possible FCPA Violations

In other beverage industry news, the Times of India reports (here) that Beam Inc.  (here) “has initiated investigations into whistleblower allegations of financial misdemeanours at its India unit.”  According to the report, the investigation covers possible violations of Foreign Corrupt Practices Act.

As noted in this previous post, in July 2011 the SEC brought an FCPA enforcement action against beverage company Diageo PLC.

Alba-Alcoa Civil Case Settles

Earlier this week, Alcoa announced (here) that it “entered into a settlement agreement with Aluminium Bahrain B.S.C. (“Alba”) resolving a civil lawsuit that had been pending … since 2008.  Without admitting any liability, Alcoa agreed to make a cash payment to Alba of $85 million payable in two installments.”

Alba was represented by Akin Gump which put out this release.   The release notes that “the settlement arises out of a claim brought by Alba under the Racketeer Influenced and Corrupt Organizations (RICO) Act against Alcoa, an Alcoa subsidiary and Canadian businessman Victor Dahdaleh alleging a “pattern of corrupt activities by the defendants and officials in Bahrain in order to obtain long-term contract and pricing advantages in the sale of raw materials.”  As noted in the release,  ‘the case was stayed for nearly four years while the U.S. Department of Justice pursued a criminal investigation under the Foreign Corrupt Practices Act” and the settlement “represents the first time that a foreign-owned corporation has successfully sued a U.S. company in a federal court to recover losses suffered due to allegations of corrupt activity. “

As highlighted in this previous post, Alcoa’s agent (Dahdaleh) has been criminally charged in the U.K.

The DOJ and SEC’s investigation of Alcoa concerning the conduct at issue in the civil lawsuit is ongoing.

In its most recent quarterly filing, Alcoa stated as follows.

The DOJ’s and the SEC’s investigations are ongoing. Alcoa has been in dialogue with both the DOJ and the SEC and is exploring whether a settlement can be reached. Given the uncertainty regarding whether a settlement can be reached and what the terms of any such settlement would be, Alcoa is unable to estimate a range of reasonably possible loss with regard to any such settlement, However, Alcoa expects the amount of any such settlement would be material in a particular period to Alcoa’s results of operations. If a settlement cannot be reached, Alcoa will proceed to trial with the DOJ and the SEC and under those circumstances is unable to predict an outcome or to estimate a range of reasonably possible loss. There can be no assurance that the final outcome of the government’s investigations would not have a material adverse effect on Alcoa.”

World Bank

The World Bank’s fraud and corruption unit, the Integrity Vice Presidency (INT), recently released its annual report (see here for the full report). This release states as follows.  The INT “concluded another strong year in its preventive and investigative efforts, with 83 debarments of wrongdoing firms, new agreements with national law enforcement authorities to expand the impact of INT’s investigations, numerous referrals to law enforcement agencies, and robust preventive efforts to help ensure Bank-financed projects deliver results.”

Survey Says

This past July, FTI Consulting conducted an on-line survey of 571 executives in UK businesses in board-level, senior management and middle management positions.  As noted in this release, among the survey findings were the following.

  • 40% of UK businesses surveyed think the current economic climate is encouraging risk taking around compliance with the UK Bribery Act
  • 27% do not believe the government will prosecute offenders
  • 25% of board-level employees surveyed might breach Bribery Act regulations to win business
  • 63% of respondents believe the UK Bribery Act eventually will have a positive effect on prospects for UK business

Spot-On

In the aftermath of the Wall Street Journal’s FCPA Inc.: Business of Bribery series (see here), the WSJ published the following letter to the editor from Steve Travis of Mercer Island, WA.

“The Foreign Corrupt Practices Act makes it illegal to offer money or a gift to foreign government officials or employees to gain a business advantage. Yet in the U.S., every business worthy of its name has lobbyists whose sole job in Washington, D.C., is to do exactly that: give money or gifts to our elected officials or employees of our government in a position to steer contracts their way. Does anyone really think that things like flying government officials around on company private jets or putting them up in private homes on vacations don’t come with a quid pro quo? Who is naive enough to think that contributions to election campaigns don’t come with strings attached?”

Spot-on – see here for a prior post (as well as numerous previous posts embedded therein).

*****

A good weekend to all.

 

Nice Pay Day, But What Did You Accomplish?

Thursday, September 20th, 2012

When I published “The Facade of FCPA Enforcement” in 2010 (see here) the trend of FCPA-inspired tag-a-long private civil suits was in its early stages.  Thus, the section of my article – why the facade of FCPA enforcement matters – did not include discussion of such suits.

Now that the trend is clear, add FCPA-inspired private civil suits to the list of reasons why the facade of FCPA enforcement matters.

The game is very predictable.  In the days and weeks following an FCPA enforcement action, or even a company disclosing or otherwise being the subject of FCPA scrutiny, the suits and/or “investigations” by plaintiffs firm will start to mount

In this prior post, I asked whether FCPA-inspired civil suits have a purpose or a parasitic.  I stated that when a company’s FCPA violations are found to be condoned or encouraged by the board or executive officers, such plaintiff causes of action would seem to be warranted.  But these situations are rare in FCPA enforcement actions.  This prior post detailed June 2011 Congressional testimony on behalf of the U.S. Chamber Institute for Legal Reform that touched upon FCPA-civil litigation and I generally agree with the criticisms made of this “piggyback-litigation phenomenon.”

Several prior posts (here and here) profile how such derivative claims seldom, if ever, get past the motion to dismiss stage.  Yet, several companies make the business judgment to  settle such claims for what amounts to nuisance value for the company, but which represents a handsome pay day for plaintiff’s counsel for doing and accomplishing next to nothing.

Two recent Foreicgn Corrupt Practices Act related civil settlements prove this point.

In July, Halliburton announced here that a Texas state court issued an order preliminarily approving the proposed settlement of a derivative claim concerning a variety of misconduct, including Bonny Island, Nigeria conduct giving rise to the previous FCPA enforcement action against Halliburton and its related entities.

Pursuant to the proposed settlement, within 90 days of a final settlement date, Halliburton’s board agreed to implement various corporate governance and internal control revisions.  The items most related to FCPA compliance should not be hard to accomplish because pursuant to the 2009 FCPA DOJ/SEC settlement, Halliburton already was under an existing obligation, including through engagement of a compliance monitor, to implement a host of FCPA related compliance enhancements.

Yet pursuant to the proposed settlement agreement, for its innovative work (that is my term), Plaintiffs’ counsel in the derivative action will seek approval of its fees and expenses not to exceed $7 million and Halliburton will not oppose such fees and will pay them through its insurance carriers.

Likewise, Johnson & Johnson recently announced (here) a proposed settlement of a derivative claim concerning a variety of misconduct, including the conduct giving rise to its 2011 FCPA enforcement action.  As detailed in this prior post, pursuant to the settlement via a DPA, the company is already subject to enhanced compliance obligations related to the FCPA.  The prior post noted that such enhanced compliance obligations were unusual and surprising given the DOJ’s conclusion that J&J already generally had “effective” policies and procedures.  In the words of the DOJ “J&J had a pre-existing compliance and ethics program that was effective and the majority of problematic operations globally resulted from insufficient implementation of the J&J compliance and ethics program in acquired companies.”

Yet, along comes the Plaintiffs’ firms with a derivative action and pursuant to the settlement, J&J has agreed to reimburse Plaintiffs’ counsel in an amount not exceeding $10 million and to pay approximately $450,000 in its expenses.

Like many things in this new era of FCPA enforcement, FCPA-civil related suits have, in many cases, spiraled out of control.  Yet with many, including now Plaintiffs firms, with a vested financial interest in seeing the status quo prevail, it is doubtful any meaningful change is on the horizon.

Yet the question can be asked, do FCPA civil-related suits accomplish anything?  Do such suits serve a purpose or are they parasitic?  Is this another reason why the “facade” of FCPA enforcement matters.

Friday Roundup

Friday, August 24th, 2012

The sting may be over but it effects are not, Orthofix information unsealed, checking in on Wal-Mart, a pipeline report, a safe assumption, and the alternative reality.   It’s all here in the Friday roundup.

Stung By The Sting

The manufactured Africa Sting case may be over, but it effects are still being felt.

Allied Defense Group (“ADG”) employed Mark Frederick Morales, one of the individuals charged in the case.  The company stated in its recent quarterly filing (here) as follows.

“In February and March, 2012, the DOJ dismissed charges against all individuals indicted in the FCPA sting operation, including the former employee of MECAR USA. Since this time, the Company’s FCPA counsel has had several discussions with the DOJ and SEC regarding the agencies’ respective inquiries. Based upon these discussions, it appears likely that resolution of these inquiries will involve a payment by the Company to at least one of these government agencies in connection with at least one transaction involving the former employee of Mecar USA. At this point, the amount of this payment is undeterminable.”

As noted in this previous post, in January 2010, ADG agreed to be acquired by Chemring Group PLC.

Another publicly traded company that employed an Africa Sting defendant, Amaro Goncalves, is Smith & Wesson.  The company disclosed in its most recent quarterly filing (here) as follows.

“On February 21, 2012, the DOJ filed a motion to dismiss with prejudice the indictments of the remaining defendants who are pending trial, including our former Vice President-Sales, International & U.S. Law Enforcement. On February 24, 2012, the district court granted the motion to dismiss. We cannot predict, however, when the investigation will be completed or its final outcome. There could be additional indictments of our company, our officers, or our employees. If the DOJ determines that we violated FCPA laws, we may face sanctions, including significant civil and criminal penalties. In addition, we could be prevented from bidding on domestic military and government contracts and could risk debarment by the U.S. Department of State. We also face increased legal expenses and could see an increase in the cost of doing international business. We could also see private civil litigation arising as a result of the outcome of the investigation. In addition, responding to the investigation may divert the time and attention of our management from normal business operations. Regardless of the outcome of the investigation, the publicity surrounding the investigation and the potential risks associated with the investigation could negatively impact the perception of our company by investors, customers, and others.”

Even though the individual Africa Sting cases are over, the case provided a point of entry into several companies and an entire industry and its effects are still being felt as demonstrated by the above disclosures.

Orthofix

This previous post discussed the July enforcement action against Orthofix International.  As noted in the post, the specifics of the DOJ’s allegations were not known as the information against Orthofix was filed under seal.  The information (here) was recently unsealed.  In summary fashion, the DOJ alleged as follows under the heading “corrupt conduct.”  “From [2003 through March 2010], with the knowledge of Orthofix Executive A [a citizen of Peru and legal permanent resident in the U.S. who was a senior manager of Orthofix Inc. (an indirectly wholly owned subsidiary) and responsible for sales operations in Latin America], Promeca [an entity incorporated and headquartered in Mexico and an indirectly wholly owned subsidiary of Orthofix International] and its employees paid approximately $300,000 to Mexican officials, in return for agreements with IMSS and its hospitals to purchase millions of dollars in Orthofix International products.”

IMSS is a social service agency of the Mexican government that provided public services to Mexican workers and their families and the Mexican Officials identified in the information are as follows.

Mexican Official 1 – a deputy administrator of Magdelena de las Salinas (a hospital in Mexico City that IMSS owned and controlled)

Mexican Official 2 – the purchasing director of Magdelena de las Salinas

Mexican Official 3  – the purchasing director of Lomas Verdes (a hospital in the State of Mexico that IMSS owned and controlled)

Mexican Official 4 – a sub-director of IMSS

According to the information, “Executive A knew of the payments and things of value [provided to the Mexican Officials] but failed to stop the scheme or report the scheme to Orthofix Interntional or Orthofix’s Inc.’s compliance department.”

Under the heading “Internal Controls” the information alleges, among other things, as follows.  “Orthofix International,which grew its direct distribution footprint in part by purchasing existing companies, often in high-risk markets, failed to engage in any serious form of corruption-related diligence before it purchased Promeca.  Although Orthofix International promulgated its own anti-corruption policy, that policy was neither translated into Spanish nor implemented at Promeca.  Orthofix International failed to provide any FCPA-related traning to many of its personnel, including Executive A.  Orthofix also failed to train Promeca personnel for years on the FCPA, to test regularly or audit particular transactions, or to ensure that subsidiary maintained controls sufficient to detect, deter or prevent illicit payments to government officials.”

The information charges one count of violating the FCPA’s internal control provisions.

Checking In On Wal-Mart

During the media feeding frenzy after the New York Times Wal-Mart article (see here for the prior post), I had the pleasure to appear on Eliot Spitzer’s Viewpoint program on Current TV.  At the end of the segment, after the substantive issues were discussed, Spitzer offered that he has several contacts in the FCPA bar and that, regardless of the substantive issues involved in Wal-Mart’s FCPA scrutiny or the ultimate outcome, lots of lawyers were poised to make lots of money.

Spitzer of course was right.

During its second quarter earnings call (see here for the transcript) Wal-Mart executives stated as follows.   ”Within core corporate, we incurred approximately $34 million in expenses related to third-party advisors reviewing matters involving the Foreign Corrupt Practices Act and we expect these expenses to continue through the rest of the year.”  Later in the call, the following was said.  “We also expect to incur approximately $35 to $40 million in expenses for the review of matters relating to the Foreign Corrupt Practices Act during each of the remaining quarters for this fiscal year.”

In other news, on the civil litigation front, as noted in this Reuters article “an Indiana union pension fund that owns shares in Wal-Mart Stores Inc has sued the company to gain access to thousands of internal documents related to allegations that a Wal-Mart subsidiary bribed Mexican government officials.”  According to the report, the lawsuit, filed in Delaware’s Chancery Court, alleges the “company had made a ‘woefully deficient’ production of documents following an earlier out-of-court demand and that hat documents were produced were ‘so heavily redacted,’ or blacked out, they were nearly worthless.”

Turning to Capital Hill, several prior posts have chronicled efforts by Representative Elijah Cummings and Henry Waxman to conduct a shadow investigation of Wal-Mart in the aftermath of the New York Times article (see here for the previous post).  As indicated in this recent press release and this recent letter the lawmakers are growing impatient.  In pertinent part, the letter to Wal-Mart CEO Michael Duke stated as follows.

“We are writing to give you a final opportunity to respond to our requests for information about allegations that your company violated the Foreign Corrupt Practices Act. Although you have stated on multiple occasions that you intend to cooperate with our investigation, you have failed to provide the documents we requested, and you continue to deny us access to key witnesses. Your actions are preventing us from assessing the thoroughness of your internal investigation and from identifying potential remedial actions.

During the course of our investigation, we have learned that Wal-Mart’s concerns about potential violations of the Foreign Corrupt Practices Act are not limited to operations in Mexico, but are global in nature. Your outside counsel informed us that, before allegations of bribery in Mexico became public, Wal-Mart retained attorneys to conduct a broad review of the company’s anti-corruption policies. This review identified five “first tier” countries “where risk was the greatest.” Wal-Mart then conducted a worldwide assessment of the company’s anti-corruption policies, culminating in a series of recommendations and policy changes based on those findings.

In addition, we have obtained internal company documents, including internal audit reports, from other sources suggesting that Wal-Mart may have had compliance issues relating not only to bribery, but also to “questionable financial behavior” including tax evasion and money laundering in Mexico.”

Pipeline Report

Add NCR Corporation and Expro International to the list of companies under FCPA scrutiny.

NCR

Global technology company NCR Corp. recently disclosed here as follows.

“NCR has received anonymous allegations from a purported whistleblower regarding certain aspects of the Company’s business practices in China, the Middle East and Africa, including allegations which, if true, might constitute violations of the Foreign Corrupt Practices Act.  NCR has certain concerns about the motivation of the purported whistleblower and the accuracy of the allegations it received, some of which appear to be untrue.  NCR takes all allegations of this sort seriously and promptly retained experienced outside counsel and began an internal investigation that is ongoing. NCR does not comment on ongoing internal investigations.  Certain of the allegations relate to NCR’s business in Syria. NCR has ceased operations in Syria, which were commercially insignificant, notified the U.S. Treasury Department, Office of Foreign Assets Control (OFAC) of potential apparent violations and is taking other measures consistent with OFAC guidelines.”
Based on the disclosure, an analyst downgraded NCR stock (see here) causing shares to drop approximately 10%.
Expro
As reported in this Wall Street Journal Corruption Currents post, Expro International (an oil field management company owned by a Goldman Sachs-backed private equity consortium) “is re-investigating claims that its employees paid bribes in Kazakhstan.”  The report states as follows.  “Expro International and the consortium, Umbrellastream, received allegations from an anonymous tipster in May that two of Expro’s former operations coordinators in Western Kazakhstan oversaw and approved bribes to customs officials there from 2006 until summer 2009, according to an email reviewed by Corruption Currents. The alleged bribes were paid to clear Expro’s equipment through customs to avoid costly delays, the tipster said.  The allegations have sparked an internal investigation by Expro’s lawyers at Gibson, Dunn & Crutcher LLP into the claims, according to another email. But it appears the investigation is not the first time Expro has scrutinized its operations in Kazakhstan.”
Add a few, but take one off.
As noted in this recent Friday roundup, Academi, Inc., formerly known as Xe Services, formerly known as Blackwater recently resolved a non-FCPA case and the DPA specifically stated that the agreement “does not apply to the Foreign Corrupt Practices Act investigation independently under investigation by the DOJ.”  As noted in this previous post, Blackwater has been under investigation for FCPA violations in Iraq and as noted in this previous post, its FCPA scrutiny in Iraq inspired Representative Peter Welch to introduce H.R. 5366, the “Overseas Contractor Reform Act,” an impotent debarment bill that passed the House in September 2010 (see here).
However, as on-line news agency Main Justice reports here, reference to the FCPA investigation in the recent DPA appears to have been a drafting error.  Citing a July 19th letter to the company, Main Justice reports that the DOJ has closed its “foreign bribery inquiry” of the company.  Main Justice cites the following portion of the declination letter.  “[The DOJ has closed its inquiry] based on a number of factors, including but not limited to, the investigation undertaken by Academi and the steps taken by the company to enhance its anti-corruption compliance program.”
A Safe Assumption

This previous post regarding the recent Pfizer enforcement action raised the following question(s).

Does anyone truly believe that the only reason Chinese doctors prescribed Pfizer products was because under the “point programs” the physician would receive a tea set?  Does anyone truly believe that the only reason Czech doctors prescribed Pfizer products was because the company sponsored educational weekend took place at an Austrian ski resort?  Does anyone truly believe that the only reason Pakistani doctors offered Wyeth nutritional products to new mothers was because the company provided office equipment to the physicians?

The questions were asked in the context of disgorgement remedies, but can also be asked in the context of product safety.  One can safely assume that if the enforcement agencies had any evidence to suggest that the products at issue jeopardized public safety, the enforcement agencies would have alleged such facts, as they occasionally do in FCPA enforcement actions (see Innospec for instance).

The absence of such allegations make this recent article by Online Pharmacy Safety foolishly speculative.  The article states as follows.

“[The conduct at issue in the enforcement action] puts the safety of consumers at risk.   If large companies are able to bribe their way to getting more business, and anticipate government officials to turn a blind eye, the wrong products could be getting into the hands of consumers worldwide.  The Pfizer products approved by foreign governments and prescribed by doctors may not have been the best product available, which could endanger consumers. Doctors put selfishness at the expense of patients, and the company was putting profits ahead of its public safety.”

Alternative Reality

Harvey Silverglate (author of Three Felonies a Day: How the Feds Target the Innocent) hit the ball out of the park with this recent Wall Street Jouranl op-ed.  Referring to the recent Gibson Guitar Lacey Act enforcement action and how the resolution documents muzzle the company (as is typical in FCPA NPAs and DPAs), Silverglate wrote as follows.

“Through these and myriad other techniques, federal investigator and prosecutors create an alternative reality that favors their own institutional interests, regardless of the truth or of justce.  All citizens and companies become subject to the Justice Department’s essentially unfettered power.  Remedying this problem cannot be left to the victims of this governmental extortion, because their risks are too high if they fight; nor will their lawyers likely blow the whistle, since the bar makes a tidy living by playing the game.  It is up to the rest of civil society to let the Justice Department emperor know that we see he is not wearing clothes.”

*****

A good weekend to all.

Friday Roundup

Friday, August 3rd, 2012

Add two more companies to the list, a reply to a retort, Avon developments, Total S.A. perhaps nears a top-5 settlement, the reason for those empty Olympic seats, another FCPA-inspired derivative action is dismissed, Sensata Technologies and more on the meaning of “declination,” one of my favorite reads and additional material for the weekend reading stack.  It’s all here in the Friday roundup.

Recent Disclosures

As noted in this Wall Street Journal Corruption Currents post “German healthcare firm Fresenius Medical Care AG has opened an internal investigation into potential violations” of the FCPA.  The company’s recent SEC filing (here) states as follows.

“The Company has received communications alleging certain conduct that may violate the U.S. Foreign Corrupt Practices Act (“FCPA”) and other anti-bribery laws. In response to the allegations, the Audit and Corporate Governance Committee of the Company’s Supervisory Board is conducting an internal review with the assistance of counsel retained for such purpose. The Company has voluntarily advised the U.S. Securities and Exchange Commission and the U.S. Department of Justice that allegations have been made and of the Company’s internal review. The Company is fully committed to FCPA compliance. It cannot predict the outcome of its review.”

In addition, as noted in this Wall Street Journal Corruption Currents post, “the Securities and Exchange Commission is investigating Teva Pharmaceutical Industries Ltd, the world’s largest manufacturer of generic drugs, for possible violations” of the FCPA.   The Israel based company recently stated in an SEC filing (here) as follows.

“Teva received a subpoena dated July 9, 2012 from the SEC to produce documents with respect to compliance with the Foreign Corrupt Practice Act (“FCPA”) in Latin America. Teva is cooperating with the government. Teva is also conducting a voluntary investigation into certain business practices which may have FCPA implications and has engaged independent counsel to assist in its investigation. These matters are in their early stages and no conclusion can be drawn at this time as to any likely outcomes.”

U.K. DPAs

In this previous post, I discussed my letter to the U.K. Ministry of Justice urging the MoJ to just say no to deferred prosecution agreements.  Over at thebriberyact.com (a site that has lead discussion of the issue) the authors disagree with me (see here).  That’s all fine and dandy and healthy to the discussion, but the substance of the retort is not persuasive.

The retort is  basically that the SFO “frequently has to fight its corner in court” and that “sometimes it loses” whereas in the U.S. “the accepted wisdom [is] that an FCPA investigation would result in a corporate settlement” and the “DOJ simply [does] not have to test its legal theories in court.”  In short, the authors state “statistically in the US corporates and their counsel often fold in the face of a DOJ investigation” but “in the UK this is not so.”

Contrary to the suggestion in the retort, I did not ignore the Bribery Act’s Section 7 offense – rather it is all the more reason to reject DPAs.

The retort closes as follows.  “Sadly, as it stands, the UK enforcement agencies do not have equality of arms when it comes to their enforcement toolkit.  Put another way the DOJ can end run UK enforcement agencies because it does have the potential to enter into DPA’s.  This reason alone is justification enough for putting in place a system which delivers a similar result to the US system.”

This confirms in my mind that the UK’s desire for DPAs has little to do with justice and deterring improper conduct, but more to do with enforcement statistics and posturing in an emerging “global arms race” when it comes to “prosecuting” corruption and bribery offenses.

Avon Developments

Avon was in the news quite a bit this week.

On Monday, the Wall Street Journal reported (here) that “federal prosecutors looking into possible bribery of foreign officials by Avon have asked to speak to Andrea Jung, the former chief executive and current full-time chairman.”

On Wednesday, the company filed its quarterly report and stated, among other things, as follows.  “We are in discussions with the SEC and DOJ regarding mutually resolving the government investigations. There can be no assurance that a settlement will be reached or, if a settlement is reached, the timing of any such settlement or that the terms of any such settlement would not have a material adverse effect on us.”  During the Q2 earnings call, company CEO Sheri McCoy stated as follows.   “We are in discussion with the SEC and DOJ regarding mutually resolving the government investigations.”

On Thursday, the Wall Street Journal reported (here) that McCoy “frustrated with the pace of Avon’s internal probe, has pushed to bring in a second law firm for advice on the progress of the investigation.   The company has held discussions with law firm Allen & Overy LLP for that role.”  Arnold & Porter has been leading Avon’s investigation.  According to the article, Avon’s “probe has turned up millions of dollars of payments in Brazil and France made to consultants hired to assist with Avon’s tax bills in those countries.”

What to make of the above information?

It is unusual for the enforcement agencies to want to speak to a former CEO and current chairman in connection with an FCPA inquiry.  But then again, prosecutors have reportedly spoken to several other Avon executives in connection with the probe.  Given Avon’s disclosure that it has begun settlement discussions, this would suggest that the factual portion of the enforcement agencies investigation is over.

Avon’s FCPA scrutiny has perhaps been most notable for the amount of pre-enforcement action professional fees and expenses – approximately $280 million.  Thus, yesterday’s report that the company is considering bringing in a second law firm nearly four years into the investigation is interesting and unusual.

Even though Avon has disclosed it is in settlement talks, an enforcement action in 2012 is not certain.  In many cases, companies have disclosed the existence of FCPA settlement discussions, but the actual enforcement action did not happen for 6-12 months (or longer).

Whenever the enforcement action occurs, and whatever the ultimate fine and penalty is, Avon’s greatest financial hit  has likely already occured - its pre-enforcement action professional fees and expenses.  For instance, assuming a settlement amount would match the $280 million, this would be the sixth largest FCPA settlement of all time, and none of the enforcement actions in the top 5 were outside the context of foreign “government” procurement.

Total Settlement Near?

For some time, there has been speculation that Total S.A. (you better sit down for this) would actually mount a defense and put the DOJ and SEC to its burden of proof in an enforcement action.  Information in a recent company press release suggests that this is unlikely to occur.  In this recent release, Total stated as follows.  “Total has been cooperating with the … SEC and DOJ in connection with an investigation concerning gas contracts awarded in Iran in the 1990′s.  Total, the SEC, and the DOJ have conducted discussions to resolve issues arising from the investigation.  In light of recent progess in these discussions, Total has provisioned 316 million euros [$389 million]  in its accounts in the second quarter of 2012.”

A $389 million settlement would be a top five FCPA settlement in terms of fine and penalty amounts.  For additional coverage, see here from Reuters.

Empty Olympic Seats

A reason, perhaps, for those empty Olympic seats?  According to a recent study (see here) by the Society for Corporate Compliance and Ethics  “tighter than anticipated corporate entertainment and gift policies.”

Smith & Wesson Derivative Action Dismissed

Even against the backdrop of generally frivolous plaintiff derivative claims in the FCPA context, the action against Smith & Wesson (“S&W”) stood out.  After S&W employee Amaro Goncalves was criminally indicted in the manufactured Africa Sting case, certain investors filed a derivative claim in U.S. District Court in Massachusetts suing members of the board of S&W and company officers derivatively on behalf of the corporation for failing to have effective FCPA controls and oversight, thereby breaching their duty of care.

In dismissing the complaint (see here for the decision) Judge Michael Ponsor characterized the complaint as follows. “[I]n essence, that the company enjoyed an increase in international sales and then had an employee indicted for FCPA violations. This indictment, later dropped, supposedly evidenced a failure to implement proper controls.”

For another recent dismissal of an FCPA inspired derivative claim against Tidewater, see this prior post.  See also this recent post from Kevin LaCroix at The D&O Diary blog.

Sensata Technologies

In October 2010, Sensata Technologies disclosed in a quarterly report (here) as follows.

“An internal investigation has been conducted under the direction of the Audit Committee of the Company’s Board of Directors to determine whether any laws, including the Foreign Corrupt Practices Act (“FCPA”), may have been violated in connection with a certain business relationship entered into by one of the Company’s operating subsidiaries involving business in China. The Company believes the amount of payments and the business involved was immaterial. The Company discontinued the specific business relationship and its investigation has not identified any other suspect transactions. The Company has contacted the United States Department of Justice and the Securities and Exchange Commission to begin the process of making a voluntary disclosure of the possible violations, the investigation, and the initial findings. The Company will cooperate fully with their review.”

In its most recent quarterly report (here), the company disclosed as follows.

“During 2012, the DOJ informed us that it has closed its inquiry into the matter but indicated that it could reopen its inquiry in the future in the event it were to receive additional information or evidence. We have not received an update from the SEC concerning the status of its inquiry.”

Did Sensata ”win a declination” as the FCPA Blog suggested here?

Since August 2010 (see here for the prior post) I have proposed that when a company voluntarily discloses an FCPA internal investigation to the DOJ and the SEC, and when the DOJ and/or SEC decline enforcement, the DOJ and/or the SEC should publicly state, in a thorough and transparent manner, the facts the company disclosed to the agencies and why the agencies declined enforcement on those facts.

Perhaps then we would know if the DOJ concluded it could prove beyond a reasonable doubt all the necessary elements of an FCPA charge, yet decided not to pursue Sensata – which is my definition of declination as noted in this prior post.  Anything else, is what the law commands, not a declination.

Favorite Read

One of my favorite reads is always Shearman & Sterling’s “Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act.”  See here for the most recent edition.

As to “foreign official,” the report states as follows. ”[T]he government does not appear to have been deterred by the [foreign official] debate. In most of the cases brought in 2012, the relevant government officials were employed by “instrumentalities” such as state health insurance plans (Orthofix), a state-owned nuclear plant (Data Systems & Solutions), government hospitals (Biomet and Smith & Nephew), a state-owned real estate development company (Peterson) a state-owned oil company (Marubeni), and state-owned airlines (NORDAM).”

As to FCPA guidance, the report states as follows. ”We understand that this guidance will be issued before October, when the US is scheduled to issue a written progress report on its implementation of the OECD Working Group on Bribery’s recommendations.”

A final kudos – Shearman & Sterling keeps its FCPA enforcement statistics the best way.  As it explains – “we count all actions against a corporate “family” as one action. Thus, if the DOJ charges a subsidiary and the SEC charges a parent issuer, that counts as one action.”  This is consistent with my “core” approach (see here), but unlike many others in the industry.

Weekend Reading Stack

An interesting and informative article (here) in Fortune about the Alba-Alcoa tussle and the role of Victor Dahdaleh.  For more on the underlying civil suit between Alba and Alcoa see this recent Wall Street Journal Corruption Currents post.

SOX’s executive certification requirements were supposed to be a panacea for corporate fraud.  It has not happened.  See here from Alison Frankel (Reuters) and here from Michael Rapoport (Wall Street Journal).  As noted in this prior post concerning the Paul Jennings (former CFO and CEO of Innospec) enforcement action, SOX certification charges were among the charges the SEC filed against Jennings.  Then SEC FCPA Unit Chief Cheryl Scarboro stated, “we will vigorously hold accountable those who approve such bribery and who sign false SOX certifications and other documents to cover up the wrongdoing.”  Speaking of Jennings, as noted in this recent U.K. Serious Fraud Office, Jennings recently pleaded guilty to one charge of conspiracy to corrupt Iraqi public officials and other agents of the Government of Iraq.

*****

A good weekend to all.